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Employment in the Public Sector

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  • Lorenzo Forni
  • Raffaela Giordano

Abstract

This paper presents a model of wage-employment determination in private and public sectors, which allows us to analyze the effects of different institutional arrangements on labor market equilibria. In particular, it focuses on how different degrees of coordination in decision processes affect hiring and wage setting outcomes. Cooperation in unions’ behavior results in wage increases and employment reduction in the private sector, whereas it induces wage moderation and employment expansion in the public sector. Not surprisingly, if public decision units do not fully internalize the aggregate budget constraint in their hiring processes, the public sector wage bill and the level of taxation increase, thus enhancing the crowding out effect on private employment. Such effect appears to be stronger in the presence of encompassing union behavior. An empirical analysis performed on a sample of OECD countries in the period 1960-2000 seems to support the main predictions of the model.

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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1085.

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Date of creation: 2003
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Handle: RePEc:ces:ceswps:_1085

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Keywords: public employment; wage bargaining; decentralization;

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References

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  1. Yann Algan & Pierre Cahuc & André Zylberberg, 2002. "Public employment and labor market performances," Working Papers 250928, Institut National de la Recherche Agronomique, France.
  2. Pedro Portugal & Mário Centeno, 2001. "Wages of Civil Servants," Economic Bulletin and Financial Stability Report Articles, Banco de Portugal, Economics and Research Department.
  3. Lorenzo Forni, 2004. "Centralization of wage bargaining and the unemployment rate: revisiting the hump-shape hypothesis," Temi di discussione (Economic working papers) 492, Bank of Italy, Economic Research and International Relations Area.
  4. Yianos Kontopoulos & Roberto Perotti, 1999. "Government Fragmentation and Fiscal Policy Outcomes: Evidence from OECD Countries," NBER Chapters, in: Fiscal Institutions and Fiscal Performance, pages 81-102 National Bureau of Economic Research, Inc.
  5. Gregory, Robert G. & Borland, Jeff, 1999. "Recent developments in public sector labor markets," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 53, pages 3573-3630 Elsevier.
  6. Ronald G. Ehrenberg & Joshua L. Schwarz, 1983. "Public Sector Labor Markets," NBER Working Papers 1179, National Bureau of Economic Research, Inc.
  7. Holmlund, Bertil, 1997. "Macroeconomic Implications of Cash Limits in the Public Sector," Economica, London School of Economics and Political Science, vol. 64(253), pages 49-62, February.
  8. Holmlund, Bertil, 1993. "Wage setting in private and public sectors in a model with endogenous government behavior," European Journal of Political Economy, Elsevier, vol. 9(2), pages 149-162, May.
  9. Boeri, Tito & Nicoletti, Giuseppe & Scarpetta, Stefano, 2000. "Regulation And Labour Market Performance," CEPR Discussion Papers 2420, C.E.P.R. Discussion Papers.
  10. McDonald, Ian M & Solow, Robert M, 1981. "Wage Bargaining and Employment," American Economic Review, American Economic Association, vol. 71(5), pages 896-908, December.
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Citations

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Cited by:
  1. Lamo, Ana & Pérez, Javier J. & Schuknecht, Ludger, 2013. "Are government wages interlinked with private sector wages?," Journal of Policy Modeling, Elsevier, vol. 35(5), pages 697-712.
  2. Afonso, António & Gomes, Pedro, 2014. "Interactions between private and public sector wages," Journal of Macroeconomics, Elsevier, vol. 39(PA), pages 97-112.
  3. Aleksandar Vasilev, 2013. "Fiscal policy in a Real-Business-Cycle model with labor-intensive government services and endogenous public sector wages and hours," Working Papers 2013_18, Business School - Economics, University of Glasgow.
  4. Eduardo Martínez Chombo, 2009. "Sources of Over-Costs and Distortions in State-Owned Utilities in Mexico," Working Papers 2009-07, Banco de México.
  5. Ardagna, Silvia, 2007. "Fiscal Policy in Unionized Labor Markets," Scholarly Articles 2580048, Harvard University Department of Economics.
  6. Fernàndez-de-Córdoba, Gonzalo & Pérez, Javier J. & Torres, José L., 2009. "Public and private sector wages interactions in a general equilibrium model," Working Paper Series 1099, European Central Bank.
  7. Domenico Depalo & Raffaela Giordano, 2011. "The public-private pay gap: a robust quantile approach," Temi di discussione (Economic working papers) 824, Bank of Italy, Economic Research and International Relations Area.
  8. Ardagna, Silvia, 2007. "Fiscal policy in unionized labor markets," Journal of Economic Dynamics and Control, Elsevier, vol. 31(5), pages 1498-1534, May.
  9. Giordano, Raffaela & Depalo, Domenico & Coutinho Pereira, Manuel & Eugène, Bruno & Papapetrou, Evangelia & Pérez, Javier J. & Reiss, Lukas & Roter, Mojca, 2011. "The public sector pay gap in a selection of Euro area countries," Working Paper Series 1406, European Central Bank.
  10. Anne Lauringson, 2010. "Measuring Union Bargaining Power In The Estonian Public Sector," University of Tartu - Faculty of Economics and Business Administration Working Paper Series 72, Faculty of Economics and Business Administration, University of Tartu (Estonia).

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